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Proposed Changes to Beneficial Owner Definition Contrary to OECD Goal

Proposed Changes to Beneficial Owner Definition Contrary to OECD Goal
9 Aug 2011

The distorted and varied interpretations of the concept "beneficial owner" have led to a risk of double taxation and non-taxation, prompting the OECD to seek clarity on the term's meaning. But feedback suggests that their proposals for change could actually cloud the definition further. {C}

The term is important because it influences the applicability of treaty benefits to those receiving dividends, royalties and interest.

"More than 30 years after the introduction of the beneficial ownership concept in the OECD model treaty, uncertainty still remains even though it is a very important concept in international tax," said Marc Sanders, partner at Taxand Netherlands, who also authored Taxand's submission to the OECD, 'Clarification of the Meaning of the Term Beneficial Owner'. He said that the "The current definition is too broad, which results in discussions and court cases."

On April 29, to address these problems, the OECD Committee on Fiscal Affairs (CFA) issued a discussion draft on the meaning of the term "beneficial owner" - found in articles 10, 11 and 12 of the OECD Model Tax Convention - inviting public comment.

Those submissions have now been received and will be examined by the CFA's Working Party 1 when it meets in September, but the initial reaction is that the proposed amendments need more work.

The discussion was instigated because it is problematic for such an expression to be used for purposes other than, or beyond, that for which it was intended. As the Chartered Institute of Taxation submission states: "This, as a result, puts more weight on the expression than it can bear".

"The technical discussion focuses on the different interpretations by common law and civil law countries. Common law countries in general apply a broad economic interpretation rather than a strict legal interpretation. The Indofood and Prevost cases are clear examples of the different approaches," said Sanders.

The suggestions for clarification, however, have not been received well.

"We believe that the suggested changes to the Commentary are neither necessary nor helpful," said Ian Menzies-Conacher, chairman of the International Taxes Sub-Committee at the Chartered Institute of Taxation, in the body's submission.

"The proposed amendments do not give certainty, and indeed even make the position rather less clear than it is now," he added.

Contributors agree that a concrete definition of the concept is going to be an unrealistic objective given the impact that would have on tax structures that are not abusive.

"It will be very difficult to apply a very detailed common definition as this may affect normal (non-treaty shopping) structures and complex financial instruments," said Sanders. "Efforts by the OECD will however assist in reducing the uncertainty on the concept."

While stakeholders have unanimously praised the OECD's recognition of the problem and its implementation of a discussion draft, most feel the proposals for amendment are not satisfactory.

"We do not disagree with the thrust of the new text in the proposed revisions to articles 10, 11 and 12 as contained in the public discussion draft, but we do consider that, unless that text is modified...to give greater clarity of how (and where) the border line is drawn, we are doubtful that the objective of the OECD will be met," said Richard Collier, global tax leader at PwC.

It is now clear that the Working Party 1 must address the issues flagged up in public comments and seek revised amendments to achieve its goal.

Sanders suggests the use of case study examples would help elucidate the concept and its interpretation, while warning that a definition that is too broadly worded would open the door for authorities to attack real, commercial structures.

"The proposed clarification is a step forward in an international consensus on the interpretation of the concept of a beneficial owner. We feel however that including examples and real life cases in the OECD commentary will achieve a better understanding of the concept," he said. "We also feel the wording in the discussion paper is too broad and may allow for a more aggressive and arbitrary approach by tax authorities towards structures which are not aimed at the abuse of treaties."

The move towards clarification on beneficial ownership has come at a time when increased information-hunting and authority aggression are the norm, meaning taxpayers should look at reassessing their tax structures and tax planning to ensure compliance.

"The recent discussion paper by the OECD shows that a broad economic approach to the interpretation of the beneficial owner in a tax structure should be expected. Tax authorities may more easily pierce through the legal veil of a tax structure based on this approach," said Sanders.

"The global focus on aggressive tax planning structures, combined with information exchange efforts and the developments on beneficial ownership, show that current (and future) tax structures should be reviewed based on the new global environment," he added.

This article was first published in the ITR on 9 August 2011.

To read more about Taxand's Response Programme click here.

Your Taxand contact for further queries is:
Marc Sanders
T. +31 20 757 09 05
E. Marc.Sanders@vmwtaxand.nl

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